Inevitable vs. Imminent

by JDH on October 12, 2013

As I sit here at my computer on this beautiful Canadian Thanksgiving Day weekend, I ponder not the great weather (which I will take advantage of with a long bike ride this afternoon) or the consumption of turkey (which I will be doing at my father’s house tomorrow) but instead I ponder the difference between the words imminent and inevitable.

They are not the same.

Next month will mark the seven year anniversary of the first post on the Buy High Sell Higher website and blog. I will wait until next month to provide a summation of those seven years, but suffice to say that for the last few years I, and many others, have watched and waited for the inevitable collapse.

The numbers appear to be overwhelming.

We have a fiat currency, backed by nothing, so the government can print as much as they desire. Since most international transactions are denominated in U.S. dollars, the U.S. can print as many as they want, with apparently no ill effects. But common sense tells us that you cannot print money forever with no consequences.

The Chinese (or whomever) are buying U.S. bonds, because they want the U.S. to continue buying goods from China. In the short term that makes sense, but in the long term how eager would I be to own a 10 year bond that pays less than 3% interest when the Fed’s stated inflation target is 2% per year? Why would I loan money for what will most likely be a negative return? At some point common sense dictates that you say “enough” and stop buying. But if China stops buying U.S. treasuries, does the U.S. stop buying Chinese goods? Does that hurt China as much as it hurts the U.S.?

So who blinks first?

Massive money printing should increase the value of hard assets, like gold. And yet, gold, that was trading at $1,900 in the summer of 2011 fell as low as $1,200 in the summer of 2013. How can a store of value lose a third of it’s value in two years while paper money continues to roll along?

More importantly, how long will this continue.

Is a default not inevitable?

Perhaps not.

To quote a famous philosopher: “If I owe you a turd, I can pay you back in turds whenever I want”. (Okay, it wasn’t really a famous philosopher who said that, but I did read it on the internet somewhere).

The U.S. dollar is paper. I can always pay you back in paper whenever I want, if I’m the U.S. government, because I can just print more paper. I will never default. It’s not possible. You may die of 1,000 cuts, but the U.S. will never overtly default.

It would appear that Janet Yellen will succeed The Bernank, and it appears that she is even more of a money printer than he is. She will continue to print money. Each existing dollar will continue to decline in value.

However, it is quite possible that this charade could continue for many months, or even years. The Powers That Be could continue to use their paper to depress the price of gold, and continue the game.

I still believe that currency destruction is inevitable, but that doesn’t imply that it’s imminent. It could happen tomorrow, but it could easily happen 20 years from now. Who knows.

Not me, but I will stop pondering now, and go enjoy the great weather. See you next week.